London - Slumping commodity prices pose a serious challenge to economic and political stability in developing economies across Latin America, Africa, the Middle East and Asia. According to the United Nations Conference on Trade and Development, 94 developing countries depended on commodities for more than 60 percent of their merchandise export revenues in 2012/13.
Sixty-three developing economies were considered “extremely commodity dependent” with commodities accounting for more than 80 percent of export earnings (”State of commodity dependence” April 2015). Most commodity-dependent developing countries rely on raw material exports for more than 20 percent of their entire economic output, in some cases rising to more than 50 percent, according to UNCTAD (”Key statistics and trends” June 2015).
During the boom years, the value of commodity exports from developing countries jumped from $2.0 trillion in 2009/10 to $3.2 trillion in 2012/13, mostly as a result of higher prices, which gives some idea of the scale of revenues now at risk. For example, oil export revenues for the members of the Organization of the Petroleum Exporting Countries (OPEC) rose from $123 billion in 1994 and $375 billion in 2004 to a peak of $1.2 trillion in 2012. OPEC export revenues had already fallen to $965 billion in 2014 and are set to fall even more sharply in 2015 as the full impact of slumping prices filters through (”Annual Statistical Bulletin” 2014).
Developing countries have always had to contend with unusually high volatility in export earnings and output as a result of the extreme variability in commodity prices. Studying a broad range of fuel, farm and metals prices since the late 19th century, researcher David Jacks identified four commodity price super-cycles since 1900 (”From boom to bust: a typology of real commodity prices in the long run” 2013). In a typical super-cycle, prices rise for 10-20 years, by 20-50 percent compared with the previous trend, before starting to decline. The whole cycle is generally completed within less than 40 years.
According to Jacks, the four commodity super-cycles peaked during the 1910s, 1950s, 1970s and most recently the 2010s. Subsequent busts in the 1930s, 1960s and 1980s/1990s proved painful for commodity dependent countries and were often characterised by debt defaults as well as political and economic instability. Previous super-cycles have been linked to the industrialisation and urbanisation of the United States in the late 19th century, the two world wars, and the reconstruction of Europe and Japan in the mid-20th century. The most recent super-cycle stemmed from the rapid industrialisation and urbanisation of China after reform and opening up in the 1980s.
BEGINNING OF THE END?
Writing in March 2013, Jacks observed 15 of the 30 commodities which he had studied since the early 20th century started to exhibit above-trend real prices beginning between 1994 and 1999. He concluded presciently: “The accumulated historical evidence on super-cycles suggests that the current super-cycles are likely at their peak and thus nearing the beginning of the end”. Commodity price cycles are associated with significant political, economic and diplomatic changes. The last big super-cycle, which started in the 1960s, peaked in the 1970s, and crashed in the 1980s, contributed to very poor economic performance and political instability in the commodity producers in the 1980s and 1990s.
The wave of defaults which swept across Latin America in the 1980s, the collapse of the Soviet Union in 1991 and the intense financial and political pressures on many oil producers in the Middle East in the 1980s and 1990s have all been blamed on the fall in commodity export revenues (“The Soviet collapse: grain and oil” 2007). Parallels with the 1980s should be drawn with great care but the potential loss of more than $1 trillion in annual export revenues, which could last for a number of years, will put the economic, social and political systems of commodity exporters under the sort of stress many have not experienced for well over a decade.
Commodity-dependent economies used increasing export revenues to improve their budget balances and public finances until 2008, but after 2008 balances deteriorated and public debt increased, according to the chief economist of the South Centre, an intergovernmental organisation set up developing countries. Most commodity dependent developing countries are entering the downturn with little or no room to manoeuvre on fiscal policy, he warned UNCTAD’s global commodities forum in April.
While a handful of gulf monarchies such as Saudi Arabia and Kuwait amassed enormous reserves during the boom, which could insulate them from the full force of the downturn for some years, the majority of commodity producing countries face a much more pressing adjustment unless prices rebound.
TERMS OF TRADE SHOCK
The plunge in commodity prices since 2012, accelerating since 2014, represents and enormous shift in the terms of trade as well as income and wealth between commodity producing and commodity consuming countries as well as individual households and businesses. Most OECD countries will big net beneficiaries since they are net food and fuel importers: obvious exceptions are Canada, Australia and New Zealand, which depend on commodities for a large share of export revenues and GDP.
Outside the OECD the picture is more complicated. Some big commodity importers, notably China, are clear winners, as are some urban households who benefit from lower food and fuel prices. But with so much economic activity in many developing countries linked to agriculture, oil and gas and mineral extraction, the impact on government revenues, jobs and incomes will be severe.
Large changes in relative prices and redistributions of income are always disruptive economically, and often politically as well. The reverse side of the 1970s commodity boom for developing countries was the energy crisis in the United States, Western Europe and Japan as prices for fuel. The painful adjustments required by the surge in energy and other commodity prices during the 1970s remain seared onto the collective memory of many advanced economies. U.S. President Jimmy Carter memorably went on television in April 1977 to have an “unpleasant talk” about the energy crisis which was “a problem unprecedented in our history” and required a brave response “the moral equivalent of war”.
The plunge in commodity prices since 2012 is a welcome break for food and fuel consumers, especially in the developed world, but for producers, many of them in developing countries, it is as much of a crisis as the price spikes of 1973/74 and 2008.